Today I am outlining why Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) could be considered an attractive addition to any stocks portfolio.
Margins on the march
One of the most encouraging points of Lloyds’ interims last month was the confirmation that the net interest margin (NIM) continues to steadily ascend. The bank saw margins improve to 2.4% during the first half of the year, up from 2.23% in the prior six-month period and versus 2.01% at the same point in 2013.
The result prompted the firm to lift its full-year guidance 16 basis points from the start of the 2013, to 2.45%, marking a terrific omen for future income. Indeed, Lloyds’ stunning NIM recovery — exacerbated by strong growth in critical customer sectors — helped to drive net interest income 12% higher during January-June to £5.8bn.
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And with the UK economic recovery continuing to click through the gears, I expect Lloyds’ lending activity to keep on heading higher.
Restructuring work still paying dividends
On top of bubbly activity in the front of store, Lloyds’ Simplification expense-slashing package is still delivering out the goods in the back.
Excluding the effects of the Financial Services Compensation Scheme, the institution saw underlying costs duck 6% lower during the first half to £4.68bn during the first half of the year. The business has pulled up trees in order to simplify processes, increase automation and slash the employee base, prompted by its desire to create a less risky and more High Street-focussed entity.
The scheme is now in its third and final year, and run-rate savings from the strategy have exceeded target and now stand at £1.8bn per annum, a figure which Lloyds believes will hit £2bn by the close of the year.
In addition to this, Lloyds’ ongoing asset-shedding scheme has also boosted the cost profile of the business. Most notably, the firm part-floated TSB Banking Group in June — with full divestment is pencilled in by the close of 2015 — while other sales include that of St James Place during the past year as well as a variety of overseas operations.
These measures have done wonders for the firm’s capital position, and Lloyds’ fully-loaded common equity tier 1 ratio rose to 11.1% during the first half of 2014 from 10.3% as of the end of last year. Given this backdrop, I believe that investors can look forward to bubbly dividends being doled out once the regulatory nod is given in coming months, as is widely expected.
